My not-so-profound thoughts about valuation, corporate finance and the news of the day!

Thursday, December 31, 2009

The market value of Tiger Woods

Tiger Woods has been in the news in these last few weeks, though not in the way he has been in the past. As his personal travails have mounted, his endorsements have dropped off. Now comes a study by two professors at UC Davis, looking at the companies that sponsor Tiger.http://www.news.ucdavis.edu/search/printable_news.lasso?id=9352&table=newsThey find that the collective market value of these firms dropped $10-$12 billion between November 27, the fateful day when Tiger drove into a fire hydrant outside his house, to December 17 (thirteen trading days later).

Note that Tiger is not the first high profile athlete whose market impact has been studied. A study of Michael Jordan's announcement that he would return to basketball (after he retired and tried baseball for a year) resulted in an increase of 2% in market value of his sponsor firms. In fact, an earlier study of firms endorsed by Tiger Woods in his glory days found that Nike and American Express gained about 1% in market value around the endorsement dates.

As an interesting aside, the UC Davis study also found that three firms, Tiger Woods PGA Tour Golf, Gatorade, and Nike, fared worst during the period after the Woods scandal came to light. Accenture, a consulting firm, showed no signs of loss in value. I would take this as an indication that Accenture has been wasting its money all these years, using Tiger Woods as a spokesperson.

On a more general note, I think this incident points to both the upside and downside of using celebrity endorsements. While there is a commercial benefit, it has to be weighed off against the potential cost of celebrities behaving badly and affecting the sponsor's reputations. For firms like Nike, both the benefits and the costs are large, since their customers are more likely to be swayed by celebrity endorsements and misadventures, but the net effect is likely to be positive. For firms like Accenture, I really do not see the net plus of using celebrity endorsements. As a business, it is unlikely that I pick my management consultant, based upon an endorsement by Tiger Woods.

26 comments:

Thanks prof for the post. Considering the market value of Tiger Woods, I have always thought that the market value is contextual. In this case, shouldnt the appropriate heading be, "Market Value of Tiger Woods' personal reputation for Sponsors." What I mean is that the market value of tiger woods would be different for say his appearing on a talk show and the viewership and therefore ad value goes up. In that specific market, the value could then be calculated. Because he is a human being, he would have associated with him, many "market values" depending on which context it is taken. They would most likely be all different. Why then most of the time the market value is referred to as the absolute market value.

If tiger woods had injured himself in way that he would not be able to play golf again, how would the stockmarket react. The sponsors dependance on Woods would then be historical. The fall in "market value" would then be accurately referred to as ," Market Value of Tiger Woods' ability to play golf in future for the Sponsors."

Shouldnt the market value, whenever mentioned, be finetuned to mention the event.

I don't completely agree with your statement 'Acccenture has been wasting its money all these years'. Just because Accenture's market value didn't drop post the news outbreak doesn't mean Tiger didn't add to the value of the company over the years. I suspect its something like the Red Queen effect- 'you've got to do all the running you can just to stay where you are'. Had they not used Tiger (or someone else), they would have been somewhat worse off, adding a little lesser value than they did.

I am sure Accenture knew very well that no client was going to choose Accenture as a consultant or a partner simply because Tiger Woods endorsed them. However, on the other hand, Accenture also had to be in the media all the time to simply stay at the top and to create recall in the minds of potential clients when it came to choosing a technology partner. That aspect of their communication is insulated from Tiger's reputation. As long as their customers keep recalling Accenture whenever they think of Tiger Woods, in good light or bad, Accenture's money is well spent.

I think a more meaningful way of understanding how much Tiger Woods added to Accenture's value would be to compare the data for the period before Tiger endorsed them to the data for the period that followed (ideally the rate of increase in value over these two periods, and not the value itself).

Well...if we take a look at the commercials that were flashed for accenture...co. specifically developed an ad which was targeted at his precisonal golfin skills to match with co's way of doing its business...even though his image has taken a hit but his golf skills remains intact...which is wat co used to promote itself in the mkt....

i dnt agree that accenture was insensible in choosin Tiger....n the reason the co. hasnt taken a hit is becoz it is not in the kind of business where people choose their business partner based on the celebrity endorsing it....

Well that same argument can be applicable for any existing debates in the world then-global warming, outsourcing, rain forests etc! I guess we all can believe whatever we want (it will all be 'fairly simple logic' to each of us) and that way all debate can be taken care of! Also, maybe there isn't anything as conceit in this world too, eh Mahesh? :P Have a great year ahead!

To be honest, I don't completely disagree with you when you say that this argument can be extended to any existing debate in the world. But let's leave that aside for now.

How do you think Tiger Woods endorsing impact the business of Accenture directly or indirectly? My bro has been a long time employee of Accenture and he keeps throwing me the rubbish that as a company they are impeccable as Woods is in Golf.

But that's something that every company wants to be isn't it? With Nike its a direct connection. Even with Pepsi and a celebrity, its fine - they are low involvement purchases which can be influenced by people you look upto. Extend that to cars, they may be high involvement purchases but they are again personal choices, So I have an inclination to go for the car which Federer endorses either because I like Federer and or because I believe Federer endorses a product which performs like how he does on a tennis court. These decisions are not the most rational but we all make such decisions.

But the choice for a consultant is a business decision where the factors influencing the decision to choose a particular consultant over another have as little to do with a celebrity as it can be. Even the country in which it is based, logo or the name itself would have more significance than the celebrity endorsement of the company.

If it is established that companies have chosen Accenture over its competitor coz of Woods endorsing them, the next thing I would do is to ensure I never have the stock of that company in my portfolio...really I dont see a point in this.

I agree totally that no client is going to choose Accenture as their partner simply because Tiger Woods endorses them. However, you also need to understand the rationale and thought process (flawed or otherwise) that goes behind these endorsements.

To me, there are two types of endorsements (much like you said). One kind is where a Nike asks you to buy their products because a Wayne Rooney uses the same products. The other kind of endorsement is where a Rolex tells buyers that they will either be perceived as as immaculate and methodical as Roger Federer if they bought the watch that he supposedly wears, or that this watch works as consistently and precisely as Federer himself works on the court.

Now with Tiger Woods and Accenture, it is more of the second case. Its like Accenture says, we are as flawless as Tiger in our execution. Now granted, no client is going to make their choice based on this. This is where the REAL purpose of advertising comes into play: Accenture wants to remain constantly at the top of their potential clients' mind. Up to a level where the decision of choosing a consultant partner is not so much about selecting one company over the other; but more about whether to go with Accenture or one of the 'others'. So to achieve that level of recall, the company just has to rope in a celebrity of that stature. Now whether creating that recall is worth the billions they spend for it is not for you and me to judge. The point is, Accenture spent that money to get to a position from where its potential clients thought of them, before say a Capgemini (or some other competitor). As long as that happened, they will consider their money well spent.

"Now whether creating that recall is worth the billions they spend for it is not for you and me to judge" - why not? Of course I have a right to judge and so does everyone.

I buy into your recall argument. But that's a good justification for their budgets on advertising as a whole. Capegemini is probably not a great comparison. IBM has just as big if not a better recall than Accenture. Remember the "Thinking room" ads. IBM ads were here, there, everywhere for a long time - justifying the recall argument. But the point is they were to the point and had a clear agenda - We are IBM and this is what we can do for you kind. But with Tiger woods I don't know what Accenture is trying to convey and whether that message carries any tangible or intangible benefit to the company.

"Its like Accenture says, we are as flawless as Tiger in our execution." Its fairly obvious that this is the idea behind Accenture signing up Tiger Woods as their brand ambassador. But Capegemini can also choose to do the same - have Federer or Don Bradman endorsing them. Then we are into the cola kinda war.

Consulting as a business itself is very vague to relate to. Its hard to establish if they have clearly added value in the long run across a large number of companies. And the logic that a celebrity endorsement can enhance their reputation and thereby lead to better business results is even more dubious.

Even assuming that it doesn't lead to better business results, they might choose to do this endorsement thing for their image - "to be seen as flawless as Woods is" but what's the point? Thats just a fancy of a few in the management who are wasting shareholders' money.

Now well...you are getting into a totally different side of it. I agree that celebrity endorsements are a very vague investment from the point of view of the company. They cost a bomb, the returns are hazy, at best, and there could arguably be several cheaper alternatives available to the management to generate the same returns.

But I was simply saying, that Accenture got what they were looking for when they signed Tiger Woods on. Whether that was really helpful or if it was worth the amount they spent is a totally different subject. The point is, as long as they achieved what they paid for, they wouldn't consider their money wasted. And in the context of the Prof's post, I feel the utility of Tiger Woods as a brand ambassador cannot be estimated, over-estimated, or undermined based simply on the immediate reaction of the market. I would be more comfortable judging that on the basis of more clearly indicative data.

"I feel the utility of Tiger Woods as a brand ambassador cannot be estimated, over-estimated, or undermined based simply on the immediate reaction of the market"

Thats a valid point. Since I agreed with prof's view, I didn't want to question the evidence for that view! To be fair to the prof, he's being consistent by interpreting the positive returns on Nike and Amex the same way as well. Not that we need to tell him about the greater uncertainty principle! So I guess he used this evidence to reinforce what he's always thought of Accenture using Tiger Woods as their brand ambassador.

Felix Salmon from Reuters had a very interesting post on his blog couple of days ago about this research from UC Davis.

I must say I completely agree with his point of view - in my opinion this research is nothing more than an example of both data mining and confirmation bias and drawing a conclusion that Tiger Woods' "scandal" had anything to do with a drop in a value of particular companies is simply wrong and unjustified.

In standard economic analysis, the immediate market reaction is often used to put monetary effects of that event. One has to look at the industry comparables and also the S&P index (for eg) to confirm that it was an isolated case and not systematic or industry specific. One also has to look at other headlines that could create such a reaction, which can be done through news wires. It is probably the best estimate as almost everything in economics is.

Fair points about over reading the UC Davis study. However, there are three separate issues that one can have with the study:1. No change in market value: The study was done incorrectly. In other words, the authors did not get the right sample of sponsor firms, measure the change in market value correctly at these firms and/or correct for overall market changes. (In my view, this is unlikely since the sampling is clearly defined to be sponsor firms, the market value change can be easily checked and the overall market did not move much during this three week period.)2. Spurious correlation: The market value at these firms dropped, but the drop had little to do with Tiger Woods. In other words, something else caused the drop and Tiger Woods happened to have his life changing moment at the same time. (Possible, I guess, but very unlikely)3. Market mistake: The market value at these firms dropped because of the Tiger Woods scandal, but the market is wrong. It is possible that the market is over reacting to an event that has little or no impact on true value.

I cannot rule out the market mistake, but my comment was predicated on the belief (and that is all it may be) that the market value change is real (and not a temporary phenomenon). If this is the case, the change in value is the present value of the income that the market perceives the firm as losing over time, as a result of Tiger Woods losing his credibility. By the same token, then, the non-change in value at Accenture can be read as an indication that the market does not believe that Accenture generates any additional income as a result of the Woods endorsement.

Leaving the data and research aside, Just curious to know your opinion on Accenture having Tiger Woods as their brand ambassador. Wear the hat of a strategy professor(not Mintzberg kind though) for a while and answer!

Ultimately, everything has to come down to cash flows, whether framed as "strategic" or not. Thus, even if Accenture was using Tiger Woods to just burnish its brand image, the effects would show up in the long term in the cash flows and value attached to the company. The loss of that endorsement value should still manifest itself in a loss in value (and a drop in stock price) today. You can argue that markets are far too myopic to reflect this value loss, but that is a different argument.

As prof has mentioned that the markets could be overestimating for instance and later that the markets could be too myopic. It is again a wake up call to people who take economics as a science. Imagine an engineer being told that the calculator that you used to measure the stresses in the bridge, could overestimate or just follows other calculators!

Prof, I agree that cash-flows will eventually be the final word. However, if the effect on cash flows is not seen in the immediate short term, how do we identify the causes on the long term effects on cash flow? As in, 2 years down the line, lets say Accenture has lost a significant amount of value. How do we ascertain that it was Tiger Woods that was getting them that value? There could be several other forces acting in different directions that could have affected the cash flow. And even if we do somehow pin the cause of the effect on cash flows, how do we decide how much of it was Tiger and how much other factors?